Recognizing Overspending Warning Signs
5 Warning Signs That You Might Be Spending Too Much A Guide by Broadway Banker Kelly Corbiere, CFA, CMT, CFP®
With today’s convenience of subscription accounts, shopping apps and easy tap-to-pay devices, it's easy to lose track of our spending habits and unknowingly fall into the trap of overspending. As bankers, we understand the importance of managing your finances effectively to achieve your financial goals. That's why we’re here to help you identify the warning signs that indicate you might be spending too much.
By spending less (and thus saving more), money can become a source of security and offer greater freedom of choice, but many of us overspend. How do we know if we’re spending too much and what’s normal? By recognizing these signs and taking control of your finances, you can create a strong budget and stay on track toward your financial goals. So, let's dive into how to measure your monthly expenses and discover the top rules of thumb for budgeting.
But first, 5 warning signs.
1. Frequent overshooting of your budgeted amounts
One of the first warning signs that you might be spending too much is consistently overshooting your budgeted amounts. If you find yourself regularly exceeding your set spending limits, it's crucial to take a step back and evaluate your expenses.
2. Increasing credit card debt
Credit cards can be convenient, but they can also lead to financial troubles if not used responsibly. One warning sign of overspending is an increasing amount of credit card debt. If you're consistently relying on credit cards to cover everyday expenses or finding it difficult to make more than the minimum payments, it's time to reassess your spending habits.
3. Neglecting savings and emergency funds
Another telltale sign of overspending is neglecting your savings and emergency funds. If you find it challenging to set aside money for savings or you consistently dip into your emergency fund for non-urgent expenses, it's a clear indication that your spending might be out of balance. Building a solid financial foundation requires regular contributions to savings and emergency funds.
4. Feeling financially stressed or overwhelmed
Overspending can lead to heightened financial stress and feeling overwhelmed. If you often feel anxious about your financial situation or find it challenging to keep up with your bills and obligations, it's essential to address these warning signs promptly. Remember, taking proactive steps to alleviate financial stress is key to regaining control of your finances.
5. Falling short on reaching your financial goals
If you constantly find yourself falling short of your savings targets or struggling to achieve milestones such as paying off debt or making major purchases, it's time to reevaluate your spending habits.
If you’re feeling like you might be experiencing one or more of these warning signs, don’t worry. We’ve got you. Let’s tackle this together by using an easy guide to spending.
The 20/30/50 Approach
“Normal” spending can be measured in two ways—on an absolute basis and in relative terms. For example, a BMW X6 that costs $100,000 entails more spending than a Toyota Corolla that costs $20,000. This illustrates how to compare spending on an absolute basis. While somewhat useful, this approach fails to consider how much a person spends relative to how much they earn. This is where the 20/30/50 relative approach comes in. There are three simple rules of thumb as a guide to spending using this tactic.
- Save 20% of your income— The first 20% of your income should be saved, ideally by automating this habit. According to renowned investor Warren Buffett, the advice here is not to “save what is left over after spending, but to spend what is left after saving.” This is the bucket of money that allows for purchases in the future. Every adult needs a savings account with a balance that equates to at least 6 months’ worth of expenses.
- Spend a maximum of 50% of income on fixed living expenses—This includes housing, utilities, transportation, insurance, food, debt payments, pet costs and similar expenses that occur monthly. Within this category, house payments or rent should be less than a third of your net salary.
- Spend less than 30% of your income on discretionary items—These are nonessential items such as entertainment, travel, gifts and other discretionary outlays.
To calculate how much of your spending falls into each category, financial experts suggest tracking spending for 1-3 months by saving receipts and recording all payments. This is the basis for creating a budget that can help maintain spending within certain parameters. Both of these tasks can be done using a simple spreadsheet, a notebook or through budget tracking apps on your mobile device.
Should you find your spending is out of line with the recommendations above, here are a few simple actions you can take to get back on track.
- Avoid making everyday purchases for goods like groceries and gasoline with credit cards if you find you cannot pay the entire credit card bill each month. The logic is paying just the minimum due on credit cards turns a $25 tank of gas into a $75 tank of gas after compound interest.
- Borrow or rent goods you intend to use only one time.
- Turn off notifications on your cell phone and delete shopping apps. Unsubscribing to emails from retailers is another option.
- Avoid subscription boxes and monthly memberships if you are not consistently using these products or services. This could even include cable television and streaming apps. The average family spends $400 per year on entertainment subscriptions they don’t use.
- Be cautious of impulsive purchases. Wait 3 days before making large purchases where these purchases are defined as those that cost more than 1% of your salary (so more than $100 for every $10,000 of income). This waiting period lets emotions settle and allows you to evaluate whether a large purchase really makes sense for you.
- Ask questions. If you find you are struggling to understand money issues, reach out to our team by visiting broadway.bank/wealth.
When it comes to spending, you are in the driver’s seat. Overspending can derail your financial goals and create unnecessary stress, but by recognizing these warning signs and taking proactive measures, you can regain control of your finances. To recap, start by evaluating your budget, cutting back on unnecessary expenses and prioritizing savings and debt repayment. Remember, financial stability is within your reach with the right strategies and mindset. At Broadway Bank, we are committed to helping you achieve your financial goals. Take charge of your financial future today and set yourself on the path to lasting financial success.
More than a Portfolio Manager
Developing a strategy to grow your wealth is important at any stage in life and should be planned with a partner who understands your goals and what success means to you. At Broadway Bank Wealth Management, our team of highly credentialed professionals collaborate to provide advice and solutions tailored to your unique circumstances. Let our wealth managers help you protect what you've worked so hard to build. Contact Kelly and her team of experts today by visiting broadway.bank/wealth.
Kelly Corbiere, CFA, CMT, CFP®
SVP, Portfolio Manager
Broadway Bank Wealth Management
(210) 283-6699
Source: US Treasury, World Bank, Bloomberg
